MACRO - supply side policy ✅ Flashcards
what are supply side policies
improve productive potential of an economy illustrated by outward shift of LRAS
what are the two approaches to supply side policies
Market-led policies = to make markets work better and give pte sector more freedom
State/government intervention = in markets to overcome market failure
objectives of supply side policies (8)
- Improve incentives to look for work and invest in peoples skills
- Increase labour and capital productivity
- Increase occupational and geographical mobility of labour to help reduce unemployment, especially natural rate
- Increase investment and research and development spending
- Promote more competition and stimulate invention and innovation to improve competitiveness
- Provide strong platform for sustained non-inflationary growth
- Encourage start-up and expansion of new businesses/enterprises especially those with export potential
- Improve the trend growth of real GDP to help improve living standards and regional economic balance
what does successful supply side policies enable/effect (5)
- Achieve a more sustained improvement in the trade off between inflation and unemployment (Phillips Curve)
- Be flexible in response to external demand and supply-side shocks eg rising energy prices
- Raise living standards through sustained long term economic growth
- Reduce unemployment by lowering frictional and structural unemployment
- Improve competitiveness in global markets and achieve stronger balance of trade in goods and services
what are examples of interventionist supply side policies (7)
- State investment in public services and infrastructure
- Commitment to minimum/living wage to improve work incentives and productivity in labour market
- Higher taxes on the wealthy to fund public/merit goods
- Active regional policy to inject extra demand into under performing areas eg northern powerhouse project
- import controls to allow domestic industries to expand
- Management of exchange rate to improve competitiveness
- Nationalisation/ tougher regulation of key industries
how can human capital be improved (4)
- Sustained gains in average educational attainment
- Expanded access to and quality of in work training and opportunities for lifelong learning
- Higher real incomes allowing people to consume more knowledge products eg online courses
- Inflow of migrants with above average skills/qualifications
what is research and development
Focuses on creation and improvement of products and processes, based on scientific research
what are the biggest barriers to innovation (3)
- risk aversion, research is expensive with uncertain rewards
- uncertainty about firms ability to exploit research profitably
- lack of high skilled workers in key research industries
what is innovation and the two types of innovation
Innovation is the commercially successful exploitation of ideas, having demand and supply side effects in markets and economy as a whole
PRODUCT INNOVATION – small scale, frequent subtle changes to characteristics and performance of good/service
PROCESS INNOVATION – changes to way in which production takes place/organised
what is creative destruction
the complete upheaval of established order in pursuit of innovation
what are industrial policies
Industrial economies designed to increase investment in emerging sectors than can form basis for future competitiveness and growth
what are examples of policies to attract FDI (8)
- attractive rates of corporation tax
- soft loans and tax reliefs
- trade and investment agreements eg TPP
- flexible labour markets and up-skilling of workers
- creation of special economic zones
- high quality critical infrastructure
- open capital markets to allow remitted profits
- attraction of relatively low unit labour costs
what are examples of market based supply side policies (6)
- Deregulation
- Privatisation
- Free trade
- Flexible working eg reforming employment laws
- Tax cuts eg business/income taxes to improve work incentives and stimulate capital investment spending
- Cutting red tape, opening economy to inward skilled labour migration and overseas trade and investment
evaluation of supply side policies. (5)
- Time lags depending on the type of policy. They may be ineffective when AD is low when reflationary monetary/fiscal policies would be more appropriate
- Some lead to greater inequality of income and wealth
- State intervention may be ineffective so risks of government failure is high
- Issues within sustainability if a country’s long term growth rate causes externalities like pollution
- Supply side improvements can occur from non-government policies eg firms innovating, investing, productivity improvements
